The markets have been moving pretty fast last week and today. Without a process in place, it can be paralyzing. Sometimes doing nothing is the correct move. Other times the market offers us an opportunity. We are evaluating opportunities in the market on a daily basis. Time will tell, but last week may have been an opportunity.
The goal of rebalancing portfolios is to sell an asset that has done well (“sell high”) and buy an asset that hasn’t done as well (“buy low”). The challenge investors have is the definition of “low” and “high” is ever-changing and often only known after the fact (despite what your brother in-law says!). To deal with this reality, one of the tools we use to help us determine when an asset class or stock is considered “high” or “low” is a volatility-adjusted chart. Weekly charts of the major asset classes are shown below: US stocks, International stocks, Emerging Market stocks, and Bonds. We’ve highlighted when the price of these asset classes has offered us an opportunity to rebalance. A red circle means sell high and a green circle means buy low. You may remember the same US stock chart was in our last market research document suggesting it was time to rebalance out of US stocks because they were expensive. Fast forward a couple weeks and the markets gave us a clear signal: buy stocks of all kinds and sell bonds.
In addition, there are relative strength charts comparing non-US stocks to US stocks. Both charts show the non-US stocks under-performing US stocks for a long time. Last week was different, but not enough to change the trend. We look at other data as well, such as the movement of the US dollar, but you can see from these charts why we’ve been overweight fixed income and underweight non-US stocks.
No process is perfect. You can see on the charts times where an asset class may have been cheap (or expensive) only to become more cheap (or expensive) weeks later. Short-term timing is impossible, but we hope the more you understand our process, the more peace of mind you will have during volatile times. Don’t hesitate to contact us with any questions!
1. Buy Low: US Stock Market
2. Buy Low: International Stocks
3. International Stocks (Still) Under-performing US Stocks
4. Buy Low: Emerging Market Stocks
5. Emerging Market Stocks (Still) Under-performing US Stocks.
6. Sell High: Bonds